Saturday, July 19, 2014

The U.S. Court of Appeals for the Ninth Circuit recently dismissed in part, reversed in part, and affirmed in part, an appeal from the dismissal of numerous allegations in multidistrict litigation challenging the role of MERS in the foreclosure process. The Ninth Circuit reversed the dismissal of a claim alleging violations of Arizona's false documents statute, but otherwise upheld the dismissal of the remaining claims.

Various borrowers residing in several states sued various financial institutes who used Mortgage Electronic Registration Systems, Inc. ("MERS") to process the notes and deeds of trust executed by the borrowers.

These lawsuits were consolidated by the Judicial Panel on Multidistrict Litigation and transferred to a Multidistrict Litigation Court ("MDL Court") in Arizona. After the MDL Court dismissed several of the actions transferred to it, plaintiffs in the remaining actions filed a single Consolidated Amended Complaint ("CAC"). The MDL Court dismissed the CAC with prejudice, and the borrowers appealed.

On appeal, the Ninth Circuit considered allegations of: (1) violation of Arizona's false documents statute, in connection with allegations of "robosigning"; (2) wrongful foreclosure in violation of Arizona, California and Nevada law, in connection with allegations that MERS impermissibly "splits" ownership of the note from ownership of the deed of trust; (3) allegations of improper nonjudicial foreclosures in violation of Nevada law; (4) allegations of aiding and abetting wrongful foreclosure under Arizona, California and Nevada law; and (5) allegations of aiding and abetting predatory lending under Arizona, California and Nevada law.

Among other reasons, the MDL Court dismissed this count based on its holding that Ariz. Rev. Stat. Sec. 33-420 does not apply to the documents alleged to be false - including an assignment of a deed of trust, and a notice of substitution of trustee - and that because the plaintiffs did not dispute their default, they had not suffered a concrete and particularized inquiry.

The Ninth Circuit reversed the MDL Court's dismissal based on a change in law, noting that in a recent decision, the Arizona Court of Appeals determined that a damages claim is available under Arizona's false documents statute where a borrower alleges that a notice of substitution of trustee and assignment of deed of trust are false. See Stauffer v. U.S. Bank National Ass'n, 308 P.3d 1173, 1175 (Ariz. Ct. App. 2013). The Stauffer decision also provided that borrowers in default did have standing to bring allegations under Sec. 33-420. Because the allegations at issue in Stauffer closely resembled the borrowers' allegations here, the Ninth Circuit reversed the MDL Court's dismissal.

The Ninth Circuit affirmed the MDL's dismissal of the remaining causes of action.

As to the count alleging wrongful foreclosure in connection with "note-splitting" - allegedly in violation of Nevada, California and Arizona law - the Ninth Circuit found that claims failed because "none of the [borrowers] has shown a lack of default, tender, or an excuse from the tender requirement, [borrowers'] wrongful foreclosure claims cannot succeed."

Next, the Ninth Circuit considered the borrowers' allegations of improper nonjudicial foreclosures in violation of Nev. Rev. Stat. Sec. 107.080. Specifically, the borrowers alleged that MERS was not the "true beneficiary" under the deed of trust, because it disclaimed any right to an interest in the property or proceeds of the loan. Thus, the borrowers argued that the parties issuing the notices of default or trustee's sale were neither the beneficiary nor the trustee appointed by the lender, in alleged violation of Nevada law.

The Ninth Circuit again disagreed with the plaintiffs, ruling that Edelstein v. Bank of New York Mellon, 286 P.3d 249 (Nev. 2012) "makes clear that MERS does have the authority, for the purposes of Nev. Rev. Stat. Sec. 107.080, to make valid assignments of the deed of trust to a successor beneficiary..."

Having found that the borrowers' allegations of wrongful foreclosures under Arizona, California and Nevada law were without merit, the Ninth Circuit had little difficulty in rejecting the related claim of aiding and abetting wrongful foreclosure.

Finally, the Ninth Circuit affirmed the dismissal of the borrowers' claim of aiding and abetting predatory lending - finding that the MDL Court's determination that these claims did not relate to the formation and operation of the MERS system was correct.

The Ninth Circuit therefore reversed and remanded the MDL's dismissal of the count concerning alleged violations of Arizona's false documents statute, and otherwise affirmed the MDL's dismissal of the remaining counts.

Sunday, July 13, 2014

The Supreme Court of California recently held that a class action trial management plan must permit the litigation of relevant affirmative defenses, even when those defenses turn on individual questions. In so ruling, the Supreme Court criticized using a sampling of class members to determine liability.

A group of business banking officers (BBOs) sued their bank employer (Employer) for alleged failure to pay overtime compensation, claiming they had been misclassified as exempt employees under the outside salesperson exemption.

The BBOs were employed to sell bank products, including loans and lines of credit, to small business customers. The Employer had classified the BBOs as exempt employees pursuant to the “outside salesperson” exemption.

As you may recall, in California, persons entitled to overtime pay include those “employed in any occupation, trade, or industry, whether compensation is measured by time, piece, or otherwise, but [do] not include any individual employed as an outside salesman …” Calif. Labor Code section 1171. An “[o]utside salesperson” is one “who customarily and regularly works more than half the working time away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities.” Calif. Industrial Wage Commission, Wage Order No. 4-2001 (Jan. 1, 2001), subd. 2(M).

Unlike the corresponding federal provision, the California’s wage order definition of an outside salesman “takes a purely quantitative approach” and focuses exclusively on whether the employee spends more than 50% of the workday engaged in sales activities outside the office. Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 797.

The trial court certified a class of 260 plaintiffs, and the parties later proceeded to trial. The trial court devised a plan to determine the extent of Employer’s liability to all class members by extrapolating from a random sample.

Without input from either side’s statistical experts, the trial court “randomly” selected 20 of the BBOs, plus the two named plaintiffs, as a representative witness group (RWG). The trial court instructed its clerk to randomly choose the twenty BBOs. When several BBOs opted out of the class or failed to respond to the trial court’s order, the trial court simply replaced those RWG members with other BBOs. At trial, the Employer was not allowed to introduce declarations or live testimony concerning the work habits of class members outside of the RWG. The Employer was not allowed to argue that many of the class members outside of the RWG had been properly classified as “exempt” from overtime compensation requirements.

Based upon testimony from the RWG members, the trial court found that the Employer had misclassified the entire class of BBOs and was required to pay overtime compensation. The trial court relied upon the Plaintiff’s statistics expert in determining damages. It calculated the average number of unpaid overtime hours worked by the RWG members and then extrapolated that figure to cover the entire class of BBOs. According to Plaintiff’s statistics expert, the margin of error was 43.3%.

This resulted in a verdict of approximately $15 million, and an average recovery of over $57,000 per person. The Court of Appeal reversed, and the California Supreme Court granted review.

The California Supreme Court noted that “as a general rule if the defendant’s liability can be determined by facts common to all members of the class, a class will be certified even if the members must individually prove their damages.” Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1021-1022. However, “class treatment” is not appropriate “if every member of the alleged class would be required to litigate numerous and substantial questions determining his individual right to recover following the ‘class judgment’” on common issues. (City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 459.)

The Supreme Court also noted that in considering whether a class action is a superior device for resolving a controversy, the manageability of individual issues is just as important as the existence of common questions uniting the proposed class. The Court explained, “[A] defense in which liability itself is predicated on factual questions specific to individual claimants poses a much greater challenge to manageability … Only in an extraordinary situation would a class action be justified where, subsequent to the class judgment, the members would be required to individually prove not only damages but also liability.”

The Court rejected the trial court’s practice of barring testimony from class members outside of the RWG: “if liability is to be established on a classwide basis, defendants must have an opportunity to present proof of their affirmative defenses within whatever method the court and the parties fashion to try these issues. If trial proceeds with a statistical model of proof, a defendant accused of misclassification must be given a chance to impeach that model or otherwise show that its liability is reduced because some plaintiffs were properly classified as exempt.”

The California Supreme Court also criticized the trial court’s sampling technique. The Court found that the RWG was too small and that the trial court should have considered input from the parties’ statistical experts prior to selecting the RWG.

The Supreme Court determined that the RWG was not randomly selected. “[E]ven when selection procedures appear to be random, errors may arise that undermine randomness. For instance, nonresponse bias can occur if a sample is chosen randomly from a group containing only survey respondents.” The Court recounted that several of the RWG members who had given favorable deposition testimony for the Employer later opted out of the lawsuit. These former class members submitted declarations stating that Plaintiff’s counsel strongly encouraged them to opt out after they were selected for the RWG. Finally, the Court found that the margin of error of 43.3% was so large that the resulting damages award violated due process.

Accordingly, the California Supreme Court reversed the trial court’s judgment, holding that the “trial court’s exclusion of all evidence about the work habits of BBOs outside the sample group and its implementation of a biased sampling plan were manifestly an abuse of the court’s discretion.” The Court instructed that, “[o]n remand, the trial court must start anew by assessing whether there is a trial plan that can properly address both common and individual issues if the case were to proceed as a class action.”

In so ruling, the Court noted that its “opinion properly identifies the shortcomings of the representative witness group in this case and the trial court‘s failure to give due consideration to the individualized evidence that [Employer] sought to introduce in its defense,” and “we cannot have confidence in [the trial court’s] findings because the trial court did not use a valid representative witness group or consider individualized evidence that might have presented a more complete picture of the class.”

Saturday, July 5, 2014

The California Court of Appeal, Fourth Appellate District, recently affirmed the dismissal of a borrower’s allegations that he was defrauded into purchasing the house by statements concerning the property’s future value by the mortgage loan broker, an inflated appraisal, and an alleged scheme by various lenders to inflate real property asset prices. The Court held that statements of future value or a high appraisal cannot form the basis of a cause of action for fraud or unfair competition.

The borrower also alleged that the National Mortgage Settlement entitled him to declaratory relief and a refinance loan. However, the Court held that the borrower, as an individual, did not have standing to enforce the National Mortgage Settlement, and declined to compel a loan refinancing under the National Mortgage Settlement.

A borrower fell behind in his payments due under two mortgage loans, and foreclosure proceedings ensued. In response, the borrower filed suit alleging (1) fraud, negative fraud, and deceit; (2) a supposed right to declaratory relief for an order terminating foreclosure proceedings and cancellation of the notes, and (3) supposed violation of California’s Unfair Competition Law (“UCL”), California Business and Professions Code section 17200.

The borrower claimed that the defendants misrepresented the "true value of the home" by misrepresenting its future value and preparing an inflated appraisal. The borrower also claimed that the defendants were required by the National Mortgage Settlement to "refinance the property with a fully amortized 30-year, or more, fixed interest rate loan in an amount [that] reflects the current, fair, and true market value of the real property ..."

As you may recall, California’s Unfair Competition Law (“UCL”)defines “‘unfair competition’ as ‘any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.’" California appellate courts are currently split as to what constitutes “unfair business practices.” The Fourth District applies a more rigorous test for unfairness in consumer UCL actions. Under the Fourth District’s test, where a claim of an unfair act or practice is predicated on public policy, “the public policy which is a predicate to the action must be ‘tethered’ to specific constitutional, statutory or regulatory provisions.” Wilson v. Hynek (2012) 207 Cal.App.4th 999, 1008, quoting Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1366.

Here, the Court of Appeal held that an actionable misrepresentation must be made about past or existing facts; statements regarding future events are merely deemed opinions. The Court also relied upon Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal.App.3d 1089, 1099 (1991), for the proposition that “the borrower should be expected to know that the appraisal is intended for the lender's benefit to assist it in determining whether to make the loan, and not for the purpose of ensuring that the borrower has made a good bargain, i.e., not to insure the success of the investment."

Thus, the Court held that the alleged supposedly comments made by the defendants concerning the future value of the borrower’s property and the allegedly inflated appraisal ordered by the defendants as part of the loan origination process could not form the basis for a cause of action for fraud.

The Court of Appeal rejected the borrower’s attempt to apply a more expansive test of unfair business practices which would have required the trial court to "weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim." The Court affirmed the dismissal because neither opinions about the possible future value of the home, nor statements about the appraisal, constituted conduct "tethered to a violation of a constitutional, statutory or regulatory provision."

The Appellate Court also affirmed the trial court’s ruling that the borrower, as an individual, did not have standing to enforce the National Mortgage Settlement. The Court held that individual borrowers are merely incidental beneficiaries of the National Mortgage Settlement and have no right to bring third-party suits to enforce the Consent Judgment.

PLEASE NOTE:

The editors and sponsoring law firm of this blog represent and serve banks, lenders, loan buyers, loan servicers, debt collectors, and other financial services companies. We do not represent consumers.

Please note that any communications or information obtained may be provided to our clients, including for the purpose of debt collection.

The information in this blog and related updates is general in nature, and should not be considered legal advice.

Legal advice requires a full and complete understanding of a particular situation. Your situation may involve material facts that prevent the direct application of the information in this blog and related updates.

You will not become a client of the editors or sponsoring law firm simply by reading this blog. In order to become a client of the editor or sponsoring law firm, the editor or sponsoring law firm must agree to represent you in writing. Until we agree to represent you in writing, we are not prevented from representing any other party.

Until you are a client of the editor or sponsoring law firm, any communications with us will not be confidential.